Intellectual Security: Patent Everything You Do, Before Someone Else Does

By Rob Garretson |
Posted 12-05-2005

Intellectual Security: Patent Everything You Do, Before Someone Else Does

Do you ever go online to reorder office supplies from Staples or OfficeMax? Are you a regular customer of the Internet grocery service Peapod.com? Then Kenn Fischburg wants a piece of the action.

Last May, Fischburg was awarded U.S. Patent No. 6,895,389 for his "Internet Procurement Method."

His patent describes a system that lets customers access an online order form that uses stored records of previous purchases and other data to simplify the buying process. He began developing the idea in 1998, to help his steady customers reorder goods on the Internet. Like Amazon.com's "1-click" purchase and Priceline.com's name-your-own-price reverse auction, Fischburg's is one of hundreds of "business-method" patents awarded each year that give the inventor a 20-year monopoly, not on the design of a machine or a physical product, but on a way of doing business. Fischburg's lawyers have begun contacting companies they believe have been using his innovation without the now-necessary license.

"The U.S. Patent and Trade Office is a tremendous reason to love the U.S.," says Fischburg, owner of Consumers Interstate Corp., a $20 million seller of office, packaging and janitorial supplies based in Norwich, Conn. "The fact that you can apply for a patent and get protectionit's tremendous. It's what makes a person want to invent something."

Though it may have been more innovative when he filed his patent application, in September 2000, Fischburg's method for simplifying online orders based on past purchases is fairly common among e-commerce sites today.

Still, he and his lawyers hope to assert his new intellectual-property rights broadly across a range of industries, not just with his competitors in the office-supply business. "It appears that [Staples and OfficeMax] are using the method," Fischburg says. "It's a legal exercise as to how close people like Peapod are to the claim. But they come close."

Fischburg is not alone in his quest to assert intellectual-property rights over a business method that became commonplace in the time it took the PTO to grant his patent. His was among 7,800 applications in 2000 that fell into the PTO's Class 705, which covers most business methods. Among those applications was another patent, awarded to Amazon.com just last month, for its method of encouraging users to write reviews of products they've bought.

On that same day, Amazon was also awarded a patent on its technique for ranking multiple-category search results, and another for its method for creating communities (called "purchase circles"), for which it filed patent applications in March 2003 and August 1999, respectively.

What is a troll?

The term "patent troll" is widely used in IP law circles, but its meaning varies depending on which side of the subpoena you're on.

"Someone who takes a single patent or a small number of patents and makes an assertion of clearly dubious merit either because the patent is invalid on its face or does not bear on the product it's being asserted against, typically seeking nuisance value."Peter Detkin, managing director, Intellectual Ventures LLC, who while an assistant general counsel at Intel Corp. coined the term "patent troll"

A company that "exists solely to license its patents or sue to enforce its patents, and not to develop or commercialize them." Jerome B. Friedman, U.S. District Court Judge, describing MercExchange, the Great Falls, Va., company and its injunction against eBay Inc.'s "Buy It Now" feature, found to infringe on its three patents

Troll (trol) n. In Norse Mythology, repulsive dwarfs who lived in caves or other hidden places. They would steal children and property but hated noise.The New Dictionary of Cultural Literacy, Third Edition.
Houghton Mifflin Co., 2002

The company hasn't disclosed if it will seek to license these patents to other online retailers, search engines or Web portals, but the patent awards touched off immediate speculation that shopping portals such as Yahoo!, and search sites that attempt to build communities, will draw the ire of Amazon.com lawyers seeking to maintain a competitive advantage and augment revenues.

The PTO has issued thousands of patents like these in recent years, littering the business landscape with land mines for unsuspecting companies and their CIOs, who must build IT systems around them. Just last July, Wal-Mart Stores Inc., Citibank, Discover Financial Services, T-Mobile and others were the latest to be sued for patent infringement by inventor Ronald Katz, who has reportedly collected nearly $1 billion in license fees for his call-center patents, which cover features such as interactive voice responses and automated prompts. (More than 100 companies have purchased licenses from Katz, including household names such as AT&T Inc., Verizon Communications Inc., Sears Holdings Corp. and IBM Corp.)

Under the law, patent holders have a range of options in asserting their rights, from collecting license fees from users to shutting down operations that infringe on their patents. Corporate mail rooms are now being flooded with "demand letters" from patent holders' attorneysmany working on a contingent-fee basisalleging patent infringement. And companies are spending billions to settle or litigate these claims.

Patenting Everything

: The Troll Business Plan">

"People will patent, or try to patent anything," says Parker Bagley, a partner in the IP group at the New York City office of law firm Milbank, Tweed, Hadley & McCloy LLP. "It's a problem for a lot of deep-pocketed companies." Not only are they facing infringement claims from competitors in their own industries, but increasingly they are attracting so-called "patent trolls"which Bagley defines as "small holding companies, or individuals, who generally have no business other than exploiting their patents."

"It's not fair to say that everybody's a troll," says Christopher Gerardi, a New York City-based senior managing director in the forensic and litigation consulting practice at FTI Consulting Inc. "Some companies have legitimate technology and have tried to develop a business model around it. But other companies' only model is to knock on doors, collect a licensing fee, and walk on to the next one."

Hundreds of patents have been awarded on e-commerce techniques across a range of industries, but the trend goes further: A Las Vegas casino has gone to court over a method for tracking frequent-gambler points. Procter & Gamble Co. has a pair of patents pending on two related methods for "media targeting"i.e., using research to define a brand's target consumers and the best communications vehicles to reach them.

A Danbury, Conn., logistics company has been granted a patent on any integrated logistics system that manages multiple shippers using multiple carriers. And a Chicago-based chain of restaurants specializing in breakfast cereal has a pending patent on its methods, which include "displaying competitively branded food products" and adding "a third portion of liquid."

"Some of these are utterly obvious," complains Jim Shepherd, vice president of research at AMR Research, in Boston. Business methods such as Amazon's 1-click purchase and Priceline.com's reverse auction methoda computer-assisted variation on the Dutch auction, which has been around for centuriesdon't deserve patent protection, he says. "I have no issue with granting copyrights to the code, to the software, but granting a patent on a business process is ludicrous. Inherently, I think that it damages competitiveness and limits innovation," he adds, noting that patent law was intended to do the opposite.

"This is one of those things where it seems like the pendulum has swung too far," agrees Bill Krivoshik, chief technology officer at Thomson Financial, the New York City division of Thomson Corp. that delivers information and workflow software to Wall Street and other financial services clients.

"If it becomes an environment where every process can be patented, and you end up spending more time arguing over cases that have no merit, then it's going to be a big drain" says Krivoshik, who joined Thomson earlier this year from Citigroup Inc. "The big guys like the Citigroups are targets to begin with just because of their size," he says, "and if you don't fight these things, you're making that target even bigger."

Fighting is just what Citigroup is doing in its legal battle with Ronald A. Katz Technology Licensing LP. Unlike most of Katz's corporate targets, which avoided or quickly settled litigation by licensing its portfolio of some 50-plus patents that cover, among other things, automated call-center operations, Citigroup has said it intends to vigorously defend the lawsuit, though a spokeswoman declined to comment further. A handful of companies have challenged Katz in court, including Verizon, West Corp. and AT&T, before settling for reportedly hefty sums.

Earlier this year Citigroup was rumored to be among dozens of companies that joined together in various industry coalitions to fight the Katz patents, coordinating efforts to search for so-called "prior art" and lobbying the PTO to reexamine the Katz portfolio. And last March the director of the PTO, Jon W. Dudas, ordered reexamination of four of Katz's patents, representing about 350 separate claims.

Meanwhile, the list of more than 100 companies that have licensed the Katz portfolio reads like a who's who of corporate giants: Bank of America Corp., Capital One Financial Corp., Dell Inc., Delta Air Lines Inc., Hewlett-Packard Co., HSN LP, Merrill Lynch & Co. Inc. and Microsoft Corp.

At an average cost of between $2 million and $3 million per case, according to FTI's Gerardi, fighting an infringement claim in court is the most expensive defense, except for, say, scrapping a multimillion dollar call-center upgrade or abandoning a seven-figure SAP implementation that streamlines a vital, but patented, business process. "Think about the thousands upon thousands of business methods that are encapsulated in the software from an SAP or a Microsoft," says AMR's Shepherd. "I don't know if what we've got there isn't a ticking time bomb."

Indeed, Citigroup's decision to contest the latest Katz lawsuit is the exception rather than the rule. As the laundry list of Katz licensees suggests, many companies choose the expedient and less costly path of settling patent claims. And patent law experts agree that companies need to make a sound business decision case by case. Yet paying license feeseven those that are a fraction of the cost of litigating an infringement claimcan be more costly in the long run.

Spending $200,000 for a license instead of spending $2 million and two years in litigation may seem like a sound business decision. "But it's really not," Gerardi says. "Once it's known that company XYZ paid $200,000 to some patent holder to walk away, somebody else will come knocking at the door."

CIOs Create First Defense

on Bad Patents">

Whether the corporate legal strategy is to settle or fight, CIOs are at the front lines of the IP battlefield and hold some of the most potent weapons. If the internal or external legal team is the heavy artillery, then the IT organization is the infantry that forms a company's first line of defense. Building a solid patent portfolio is key, particularly in industries such as financial services that are attracting increased attention from patent assertion firms.

Companies with their own arsenal of patents can often brandish them as countermeasures against would-be complainants, chasing away the weakest claims or, at worst, leading to relatively harmless cross-licensing deals, legal experts say. Though such tactics are often less effective with trolls, who have no use for cross-licensing deals, they can encourage trolls to move on to easier marks. More important, aggressively building a patent portfolio enforces a discipline in documenting business processes in IT departments. That documentation, even in the absence of relevant patent awards, can help prove a prior use of a patented business method, which can invalidate infringement claims brought by trolls and competitors alike.

Traditionally, financial services firms have not patented their own inventions. "The financial services industry is pretty much in the crosshairs, because they have a lot of processes and business methods incorporated in these organizations and there's a lot of money on the table," Gerardi says. "And they haven't been as involved in [IP protection] as traditional technology and manufacturing companies have in the past."

American Express Co., for example, launched an aggressive campaign to beef up its patent portfolio after two key business units were sued for patent infringement in 2000. Datascape Inc., of Atlanta, alleged that the American Express smart carda charge card with an embedded computer chipinfringed on its patent on distribution software for wireless devices, while Meridian Enterprises Corp., of St. Louis, sued the company (and 18 others), claiming they infringed on its patent for tracking reward points. The following year, both suits were settled on undisclosed terms, and American Express filed 36 new patent applications. The company now holds at least 50 patents, five times the number it held in 1998.

"It's very useful to have some chips, if you want to play poker," says Carolyn Blankenship, a senior vice president and principal legal counsel for intellectual property at Reuters America LLC, in New York City. "You've got to have something in the kitty, so that if somebody comes to you [with an infringement claim] you have something to negotiate with." Reuters has been at the forefront of Wall Street firms patenting business methods: It filed for patents in 1994 and 1995 on methods of automating electronic tradingyears before a federal court opened the floodgates on business-method patents in a landmark decision against State Street Bank, in 1998. "We have what I regard as some of the earliest business-method patents," Blankenship says. "We're known as a media company, but we have a rich portfolio of technology."

Blankenship works closely with Nic Fulton, head of media technology at Reuters, and his development teams to make sure that the company's technology organizations are adequately documenting their own innovations, and bringing patentable inventions to the attention of the legal team for protection. "A lot of technical people, myself included, have egos, and technology egos are about being new, creative, inventive," says Fulton, who filed for his first patent at Reuters six years ago on a system for automating news production and distribution.

Aside from stroking the egos of its IT staff, Reuters also provides financial incentives both for patent applications and for patent awards, though Blankenship and Fulton declined to provide more details. Every technology project manager's checklist includes a patent review, along with other legal requirements such as privacy, compliance with data protection laws and copyright labeling.

Even Non

-Innovators are at Risk">

Reuters' legal department also offers frequent and ongoing training classes and Webinars for the IT development group to teach the finer points of innovation and patent protection. And Blankenship was one of the more popular special guests at the company's internal developers' conference, held last August in Las Vegas, at which it gathered 400 of its key developers and technology managers from around the world.

Even companies that don't innovate enough to merit patent protection and merely deploy proven technology to assist time-tested business processes should step up their documentation of any new systems, experts recommend. "Even if you don't get patent protection, if you have a good system in place that documents when your inventors did something, those dates can be very critical in terms of defending against an attack by a patent troll," says Lewis Gould, who chairs the IP practice group at law firm Duane Morris LLP in Philadelphia.

Development needs to be documented meticulously, both to assist in prosecuting patent applications and to defend against infringement claims, echoes Dan Davis, chief technology officer at Morgan Beaumont Inc., a Bradenton, Fla., provider of stored-value debit cards. "It's pretty simple to do, but if you don't do it the right way, it's not a viable document in litigation," he cautions. "Things as simple as making sure that your documentation is done, for example, in a numbered journal with non-removable pages and then, at least on a periodic basis, having the dates notarized."

This type of legal minutiae may not come easily to overtaxed IT departments stretched thin by recent bouts of prolonged belt-tightening, but it may be the best defense against a mounting army of trolls that would make J.R.R. Tolkien shake in his boots.

Laments Thomson's Krivoshik: "If everyone feels that they need to play in that defensive mode, it's going to be a big drain on financial resources, but also, quite frankly, a drain on the intellectual resources that could be better served building the next solution for your customer or end client."

ROB GARRETSON has more than 20 years' experience as a business and technology journalist, most recently as a reporter and an editor on the financial desk of The Washington Post.

There Must Be Someone I Can Sue!

PATENT HOLDER

PATENT

WHO SUED WHOM

STATUS

AT&T Corp.

No. 5,333,184, issued July 1994, for a method of automatically routing a telephone call to the caller's long distance carrier and for determining whether a caller shares the same long distance carrier as the party being called for
the purpose of billing at a discount, á là MCI's Friends & Family plan.

AT&T sued Excel Communications Inc. for patent infringement.

The Supreme Court in 1999 confirmed a lower court ruling
that upheld AT&T's patent on grounds that business methods expressed as a process alone and not necessarily tied to a machine (e.g., a computer), are eligible for patents.

Walker Asset Management, Ltd. (Priceline.com)

No. 5,794,207, issued August 1998, for
a method that enables reverse auctions over a communications network, implemented in Priceline's name-your-own-price method.

Case settled in 2001 with
Expedia agreeing to pay Priceline a nominal royalty.

Amazon.com, Inc.

No. 5,960,411, issued September 1999, for software that stores a customer's address and credit card information and retrieves it for repeat buyers, the famous "1-Click" purchase method.

Amazon sued and gained a preliminary injunction against Barnesandnoble.com LLC.

Case settled in 2002 on undisclosed terms after Barnesandnoble.com added a second mouse click to its checkout.

MercExchange, LLC.

(Thomas G. Woolston) Nos. 5,845,265 and 6,085,176, issued in December 1998 and July 2000, respectively, for a method and apparatus for creating a computerized market for used and collectible goods, plus No. 6,266,651 issued in July 2001 for facilitating electronic commerce through two-tiered electronic markets and auctions.

MercExchange and its CEO, former CIA technology officer Woolston, sued eBay for infringement of its patents, but most notably for its use of the "Buy It Now" fixed-price option for eBay auctions.

The U.S. Supreme Court agreed in late November to hear an appeal of lower court rulings upholding at least one of MercExchange's patents, indicating it would reconsider a 1908 precedent suggesting that injunctions are the standard remedy for patent infringement.